This chapter focuses again on the human side of trading. While in the poor-house, Larry is offered assistance by a brokerage firm with special needs. While working within this firm, Livingstone lets his feelings win over his judgement again and makes a mistake that he regretted more than any other he made on Wall St. One can repay money with money, kindness and favours must be paid back in kind. This is where Larry undid himself, by allowing himself, unknowingly, to be used by a brilliant and cold-blooded businessman.

An interesting theme in this book is repeated in the way the character reacts once he realizes that he has been used. Even though he was hurt and angry, he simple thanked his sponsor and left. He was as angry at himself for the markets were trading well and he was reading it accurately, but he let his own gratitude tie his hands. Following this involvement, the markets went flat – no profit to be made – for five years where Larry lived again in the poor-house. But worse, he was not only broke, but now he was greatly in debt.

XIV

This was a great chapter for me to read at this time in my life. It focuses on the importance of self-study. One must work out internal conflict to be able to trade the market effecively.

XV

Coffee example – a trader must be prepared for the unexpected and the unexpectable!

Trading is a high stress occupation, and frequent holidays are important. Larry removes himself from even hearing about the markets by going out on a fishing boat. When he does finally hear about the market while on holidays, Larry often cuts his holidays shorter than planned if he sees that the market is ready for it’s next movement. Before going on holidays, all positions are liquidated.

After this fishing trip, Larry returns to the quotation board and watches the tape for an idea of the market’s mood. Although he is generally bearish, the short-term indications seem to point him to long one particularly active stock. He explains his reasons for buying the stock and puts on a large line. As it turns out, the position wasn’t proven correct so he bales out – then shares his observation of others who stayed long and started to sweat, and to hope. ‘The only thing a man can do when he is wrong is to be right by ceasing to be wrong’. In exiting his position, Larry sells at the market. Although one can lose a few ticks on poor execution by a broker, setting a limit order is often worse. Often your limit isn’t hit, and you get stuck with a bigger loss when you try to get out later. When you want to get out, get out.

Market behavior and people behavior are not the same. After an outrageous rally in a bear market, people started to talk bullish again. The course of the market, however, said the rally had run it’s course. And Larry sold. His profits reminded him that he was right and he sold more. After four months of trading on the bear side, the markets began to slow down. Larry cleaned up operations and took a holiday in Europe for the summer. Returning early from this trip as well because of market conditions, we are again given the inside view of the ‘other’ traders mind. The market was megaphoning it’s warning to the world until the day of reckoning for the bulls that, ‘dreading the pain of a small loss at the beginning, were now about to suffer total amputation – without anesthetics.’ The mouse in the glass bell analogy fits perfectly.

The rest of the chapter talks about the tightness at the bottom of the bear market, the profits that our character has pulled from the markets, and finishes with a great quote; ‘But my biggest winnings were not in dollars but in the intangibles: I had been right, I had looked ahead and followed a clear-cut plan. I had learned what a man must do in order to make big money; I was permanently out of the gambler class’

Independent thinking – separation from the opinions, surmises and suspicions of other people, however friendly and able they may be – is a vital key to trading the general market swings. You must go by your own meaning of the facts you observe. This is the only way you will bump up against the truth. Only through this process do you gain confidence in that events, and not vanity, proves that you can read the tape well enough to win. With this insight, one is also able to remain distant and objective even when the market unexpectedly, or even illogically goes against your position.

One should let their mind dwell on the general market that one is trading in, bull or bear, then put into practice a method of anticipating probabilities. One drawback is that one has to have a trading stake large enough to trade this way.

Once he started looking at the general market outlook, he was no longer satisfied merely reading the tape and ceased to be concerned with the daily fluctuation of individual stocks. In sizing up the general market, Larry spoke of the value of the daily dope, or the news off the wire. At every angle he gave them low marks, but pieced the news together himself. He looked to where the money was flowing in the economy of the world at the time and gives picture that we see, in hindsight, see to be a prophetic crystal ball. A major bear market was in the developing stages and he could see nothing to prevent it.

Larry outlines his expectations, his trades, his losses, another attempt, another loss and another quick covering of his short positions…losing money. Each time the market showed weakness, as he correctly foresaw, he would put out a large line, only to have the market continue to advance… While outlining the actions he took, Larry adds hindsight to his commentary to reveal the mistakes that were his undoing. At the time he could only see the inevitable – the sure trade, and it lead to another financial ruin. He was forced to get credit from his brokerage firm.

Now, after a series of spankings from the market, he was less careless – he simply had to be sure this time. In retrospect, Larry points to this as the first campaign along the lines that he had followed since. He waited and sold more intelligently. A little of this, a little of that on more weakness. The whole list was soft as mush. Then, on a small rally, he recalls the advice and beliefs of others. And begins to observe their rationalizations, but can ignore them because he still sees the general market direction. In his selling, he speaks of seeking out the weaker ones and letting them have it. I think he refers to using relative strength on charts, or technical analysis. However, even the stock showing weakness last will have to follow if the underlying conditions prevail against it, just don’t become impatient.

Once the market broke, Larry added to his winning positions using the method of placing bets as outlined in Chapter VII.

Larry introduced his method of testing the market for confirmation before putting on his full position, so the reader would more clearly recognize the damage – the avoidable damage – that poor risk control did to his trading stake.

Once his timing was correct, and he added on his correct assumptions, he made great profits! When the move had lost it’s momentum, Larry liquidated, took a vacation and gave the markets no thought for some time.

This Chapter focuses on two topics. First, Larry gets a Hunch that turns out very profitable. Second, we get to walk through the negative effects of listening to tips – even from intelligent, non-biased sources.

The Hunch is not a logical trading decision, but purely a gut feeling. As I read this chapter it seemed to me that Larry’s discussion with his friend would be the internal thoughts and battles one would be having as they tried to understand why they were compelled to follow the Hunch; should they stick with it etc… The counter-intuitive judgement? Or it may idea be the Creative Mind at work, subconsciously assembling all the gathered information until – the Hunch forms. Once the Hunch proved itself correct, Larry did the only thing he could do – add to the position. His strategy here is in complete accordance with Phantom of The Pits – Rule #2.

The second theme centered on the perils of acting on someone else’s market tip – even if the are in a position to get inside information. This is a reoccurring example of having to have faith in your own judgment and trading.

The correctness of the tip is less important than the process of gathering the information needed to form a certain opinion as to the market direction.

The different processes used to make money leave different echo’s on your psychological perspective – which can alter your judgment. This painful experience, Larry says, completed his education as a trader. I found this to be a very heavy statement.

It was not just learning to follow his own assessment, rather than following the tips of others, but that he gained the confidence in himself necessary to entirely shake off his old way of trading.

Noting the behavior of a stock and studying it’s past performance is a very old art form. Even at the turn of the century, traders were keeping monthly charts and intra-day charts, they studied seasonal patterns as well. But it is easy to suffer from over-specialization if the analysis doesn’t appraise the market conditions as a whole.

Larry tells us his main trouble – that he was blind to and that cost him so dearly – was in not recognizing the difference between stock gambling, betting on fluctuations, and stock speculation, anticipating inevitable advances and declines. This is one of the mistakes that the average trader makes year in and year out. One his third entry into the New York Exchange, Larry’s expectations were more patient and long-term. For a paragraph, the author explains his perspective on how trading is balanced with other aspects of living once the markets were closed. Though he lived well and denied no wants, he knew that could never afford anything that kept him from feeling physically or mentally fit, and emphasized the importance of a good nights sleep for Balance in the rest of his living. He was not over-specialized. His first change in trading was in the aspect of time. He looked for the long-term advances and declines and studied trade reports, railroad earnings and other statistics. In a Bucket Shop, he only considered studying the past hour of price activity!

If I had lost oftener, it would have lead me to more continuous study… Larry says, and gives us his method of studying new ideas; Before I can solve a problem I must state it to myself. When I think I have found a solution I must prove I am right. I know of only one way to prove it; and that is, with my own money. Later he adds that there is as much to learn from partial victory as there is from defeat.

Larry found a mentor among the crowd of average customers. An old man who listened politely to everybody, but traded differently. He sat unconcerned when minor price fluctuations made everyone else flee. He held a long term perspective on the direction of the entire market, knowing that the big money was not made in reading the tape, but in sizing up the entire market and it’s trend. Here, Larry reflects over his life of trading and confirms this reality stating:

It was never my thinking that made the big money for me. It was always my sitting

Men who are right and can sit tight are uncommon, he explains, because most become impatient or doubtful when the market takes it’s time doing what you figured it must do. It takes brains and vision to put on a position at the beginning of a reversal of general directions. It is against the opinion of the majority. This emphasis on longer-term trading in the book makes me re-think the value of TWMPMM, and makes me think a Book Report on the Edward’s and Magee classic; Technical Analysis of Stock Trends would be a great addition to my list. The major reversal patterns and consolidation patterns, along with volume, divergence’s and relative strength patterns, should be studied more closely.

Larry comments that the intelligent patience to sit tight was the hardest thing for him to learn. It is very difficult to un-learn bad habits from the past. With faith in your judgment, you can sit without a twinge of impatience, even in the face of a set-back. He began to treat his paper-profits differently than his initial equity – more willing to risk open equity for the opportunity of catching the big swings, that’s what makes you the big money. Larry makes a remark that closely parolees Dan Millman’s ‘Stages of Awareness’ in learning.

If I learned all this so slowly, it was because I learned by my mistakes, and some time always lapses between making a mistake and realizing it, and more time between realizing it and exactly determining it.

Outside of trading, the book’s character lives the high life of style and taste. He is not yet looking at his life in the long-term, and has not yet seen the value of a nest-egg.

Livingstone lets us look over his views on the type of determination needed to win at this game.

“A man must believe in himself and his judgment if he is to make a living at this game.”

He gives a few great examples of the hard lessons he learned by going with someone else’s opinion or trading advice. Your own opinion based on your own research, by trying it with money, is the only way to have the confidence to go against everyone else’s advice at the correct time.

He walks us through his learning phases, with the benefit of hindsight added like a mystery story, edging the reader to uncover the source of the self-admitted blind-spot in his trading. What general principal was he ignoring that could be so surely fatal?

“I was dead right and – I lost every cent I had!”

“If the unusual didn’t happen there would be no difference in people and then there wouldn’t be any fun in life.”

The habits he found so successful in the Bucket Shops (Paper Trading) were undoing him a reputable brokers office – yet he could not state his own problem to himself and, of course, he could not solve it. But he did worse than not see his error, he kept on trading. Soon he was broke again, and had to leave New York. Larry adds in a few paragraphs what took him years of experience to realize about the markets. He adds the advice to use market orders for entering and exiting a position rather than limit orders.